The golden rules of investing

What are the golden rules of investing?  Here is a list from a site in India, circa  February 08, 2006:

Sensex is on fire, notwithstanding Wednesday’s dip. It’s a bull run
like no other witnessed by Indian investors. And investment gurus —
like Marc Faber — say this bull run could last for a decade or more!

So what does the layman do
in times of a roaring bull market? Are there any rules for you and me
to follow while dealing in the stock market? What should you avoid
doing? And, more importantly, what should you do? Here are some golden rules of investing to follow:

1. Don’t be greedy: Invest smartly, with some professional help
and some study on your own.

2. Avoid ‘hot tips’: Stay
away from ‘experts’. Use
your own judgement.

3. Avoid trading/timing the market:

4. Avoid actions based on sentiments: Don’t
be emotionally attached to stocks:

5. Don’t panic if the market drops:  Hold onto your
winners and sell your losers.

6. Stay invested, possibly continue to invest more: It
is natural to book profits with the markets at higher levels.

7. Buy stocks if there is a 5-8 per cent drop in the market: In this bull market, a 5-8 per cent drop in prices offers you a good opportunity to buy scrips.

8. Avoid checking the price of stocks or mutual funds after you’ve sold them:

9. Avoid penny stocks:

10. Diversify:  We
suggest you diversify a bit, looking at stocks, mutual funds,
commodities and gold.
(I disagree with this one in form at least)

11. Don’t commit large amounts of money: Even
if you have a strong risk-bearing capacity, we suggest you do not
commit large sums of money at this stage.

12. Don’t trade for short-term

13. Don’t expect to be a millionaire overnight. Patience pays, so be realistic. 14. Stick to the desired asset allocation:  Asset allocation is the
key to successful investing, say experts. Even though equities may
outperform debt substantially, it will not be wise to put all your
investments in equities.

14. Distinguish between stocks for keeps and trading:  A variation of "never let a trade become an investment."

Buy with adequate
margin of safety: That’s where attractive purchase prices can help. As
a matter of fact, selling stocks is no different from buying them. Keep
a sufficient margin of safety when buying a stock and don’t rely on
making a good sale ever.

15. Sell when value is realised: If
you feel that your investments are adequately valued, you should exit
regardless of how long you have held them.

16. Keep a watch on relative valuations: The
real cost of a stock is not the price you pay for it, but the
opportunity cost of not putting your money in another one.

17. If you realise a mistake, exit immediately

18. Start investing early.

19. Try to invest in things you know.

20. Try to adopt a long-term perspective with regard to investing.

21. Know your risk: Understand the level and amount of investment you are comfortable with.

22. Play safe, invest in a mutual fund: For
those who are still not sure about their research, use mutual funds.

23. Encash when stock prices dip: Reduce some exposure, lock in some profits.

24. Don’t blindly follow media reports on corporate developments, as they could be misleading.

25. Don’t blindly imitate investment decisions of others who may have profited from their investment decisions.

26. Don’t fall prey to promises of guaranteed returns.

Note that these rules are universal, and apply anywhere in the worlkd, as they are based upon Human Nature and behavior.



The golden rules of investing
rediff Business Desk |
February  08, 2006 | 11:29 IST

With inputs from the Bombay Stock Exchange, the Securities and Exchange Board of India, Business Standard and


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What's been said:

Discussions found on the web:
  1. Robert Campbell commented on Jun 18

    LOL I personally find these rules incredibly simplistic and almost void of practical value.

    How about this rule”

    “If a stock is going up, buy it. If not, don’t buy it.”

  2. toddZ commented on Jun 18

    I bet a ton of people lost their shirts on Rule #7… The BSE is down 20-30% so far!

  3. Yaser Anwar commented on Jun 18

    In May around $2 trillion of global wealth was wiped out.
    Markets were flying high without corrections, so i think the corrections here in the US and globally were much needed.

    There are alot of bargains out there, such as SAY which trades at a forward multiple of 18 with growth of 23% and plenty more.

  4. juker commented on Jun 18

    This misquotes Marc Faber.

    I must paraphrase but it is more accurate to write that Mr. Faber’s recent view is that India stocks are overheated for now but the country’s long term outlook is extremely bullish.

    Not the same as saying the market bubble will last ten more years.

  5. Barry Ritholtz commented on Jun 18

    Robert Campbell —

    They may be “incredibly simplistic,” but they are hardly “void of practical value.”

    I don’t agree with all of them, but they offer basic advice — stuff that far too few people follow.

    Bottom line: Betteer than nothing!

  6. SoCal Chris commented on Jun 19

    My tips are more universal … but so self-evident and/or guileless as to render them useless to most treasure seekers:

    1) Start when you are born (or before).

    2) Diversify.

    3) Pay as little possible in transaction costs, fees, etc.

  7. Dr. Artfredo C. Abella Ph.D.,- New York, USA – U.E. commented on Jun 6

    What is more important in dealing or buying stocks is that you are buying the ownership of corporations instead of their products. The advantages therefore if your are a part owner of the corporation where you bought your stocks are the following: A) You are entitled to the profit sharing if the company earns profit at the end of the year. B) You are entitled to stock dividends once the Board of Directors decide to declare one. C) You are entitled to a Stockholders’ meeting where you are entitled to vote for the elections of the incoming officers. D) You are entitled to a stock right options where you can buy stocks in its Initial Price Offering (IPO). D) You are entitled to sell the shares if you feel you have gained or loss as the case maybe and E) You can leverage time to your advantage and might possibly become rich. Let us say you bought .001 per share of stock at 100,000 shares and eventually by sheer luck and boom the business increased its par value to 20 dollars per share so instantly you become a 2 Million dollar man. (Nothing is impossible in this earth) The holistic idea why you have to buy stocks and invest in it is because you are now into the venture of investments and you invest more than you spend which rationalizes why you are affluent, rich, wealthy and a millionaire.

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